Is the budget deal the final word on contractor compensation?

Tucked away inside the bipartisan budget deal announced with much fanfare this week is a proposal limiting the maximum level contractors can charge the government to pay the salaries of their top executives to nearly half of what it is currently.

The bipartisan budget bill, approved by the House Thursday, repeals a 15-year old law tying contractor compensation to the salaries earned by private-sector CEOs and limits the amount contractors can charge the government for executive pay to $487,000, an amount that would rise slightly each year with inflation.

But it may not be the final word on the issue on the sticky issue of contractor compensation.

For one thing, the bill requires the Defense Department and the Office of Management and Budget to conduct a follow-up report within three months examining whether alternative approaches to that hard cap would be more appropriate.

And for another, the budget deal’s proposed changes to taxpayer-funded contractor salaries are competing with another piece of bipartisan legislation currently before Congress. The annual Defense Authorization Act, also passed by the House, seeks to lower the compensation limit but by far less than the budget deal.

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Bill repeals ‘flawed’ formula

In general, the contractor compensation cap sets limits on how much contractors can charge the government for the salaries of their top executives. However, the law doesn’t bar what companies can actually pay their employees — it only sets limits on how much can be charged to the government under cost-reimbursement type contracts.

The current formula, which budget negotiators described as “flawed,” has allowed government-reimbursed contractor pay to grow in real terms by 95 percent since it was first used in 1998. Just last week, the Office of Federal Procurement Policy announced the cap was set to increase to about $952,000.

“It was glaring that the cap needed to be revisited,” said Dan Gordon, the associate dean for government procurement law at George Washington University Law School and the former administrator of the Office of Federal Procurement Policy.

“While I have great sympathy for my friends in the contracting community, caps that are above half a million dollars are simply too high for the American people to accept,” he added.

The Obama administration has long pushed Congress to lower the pay cap, calling most recently for a $400,000 limit in May. Under Gordon’s tenure at OFPP, the administration earlier proposed a $200,000 cap.

Still, the administration supports the proposed cap in the budget bill.

“We are pleased that Congress is taking action to address the unjustifiably high contractor executive reimbursement required under current law,” said Frank Benenati, OMB’s press secretary. “The budget agreement now being considered by Congress includes a new lower cap and other related provisions that are very similar to the legislative proposal put forward by the President earlier this year.”

Industry laments lower cap

Under cost-reimbursement type contracts — a minority of federal contracts — companies bill the government for their executives’ time. But, under longstanding federal procurement regulations, the government only has to reimburse reasonable costs.

“No company worth their salt is going to charge costs that aren’t necessary, because in this market they’re going get priced out,” said Stan Soloway, president and CEO of the Professional Services Council, which represents hundreds of government contractors,

Still, Soloway agreed that the old formula needed updating.

“The issue here is to make sure the government isn’t paying egregious salaries but not harming companies’ ability,” to compete for top talent in a tight market, he said.

Contractors and industry groups have maintained that an inflexible salary cap would make recruiting competitive fields, such as technology, difficult. The budget deal does provide some “narrowly targeted exceptions,” for highly sought-after technical positions, such as scientists and engineers.

Soloway said he supported the lower contractor compensation limit contained in the compromise National Defense Authorization bill also introduced this week. That measure would have capped reimbursable contractor salaries at $625,000 and exempted more job positions, such as cybersecurity experts, from the cap.

The authors of the Defense policy bill, in a summary of the bill posted online, said they had rejected a lower cap because it would “serve to drive critical talent from the nation’s industrial base.”

Both the Defense bill and the budget deal are must-pass pieces of legislation — and both garnered early bipartisan support. Even though the two conflict on contractor pay, a Senate aide said it’s too late to remove the provision from either bill and that whichever one was passed later would be the law.

It’s also not entirely clear how much the budget deal’s compensation proposal would save.

At least 616 contractor employees earned compensation in excess of $400,000 in 2012, according to a Government Accountability Office report from earlier this year. If the cap were lowered to that level, about $180 million in compensation costs would no longer be reimbursable by the government, GAO reported. However, the agency’s report was based on a random sample of 27 companies, which excluded three of the largest defense contractors — Northrop Grumman, Lockheed Martin and Boeing — because the companies did not provide GAO with data.